What Should I Look For When Reviewing a Franchise Agreement?

So, you’ve read through the information pack, and this franchise opportunity is looking pretty good. The chance to make great money, be your own boss, and rely on a trusted brand and systems in doing so sounds pretty tempting. So you’ve decided to go ahead, and are now in receipt of a big bundle of legal documents – what next? It’s important not to forget reviewing a franchise agreement.

Consult a franchise lawyer

The first thing you should do is consult a franchise lawyer. And we’re not just saying that because we’re franchise lawyers. Just with any other thick bundle of legal documents, the devil is often in the detail, and a franchise lawyer will be able to review the documents for inconsistencies, onerous clauses or clauses that do not comply with the Franchising Code of Conduct and other applicable legislation and legal principals. Use your franchise lawyer to your advantage, and don’t be afraid to ask them questions if you are having trouble interpreting a particular clause or how the agreement will apply to certain situations.

What else to look for

But there are other, more practical, things you can do on your own to determine if you really want to sign on the dotted line.

Look at the basics of the agreement, usually found in the schedule to the Franchise Agreement. Such things as term, area and parties should all be clearly defined.

Look at the itemization of expenses as contained in the Disclosure Document, and use those figures to prepare a cash flow forecast and detailed business plan.

Look at the number, location and turnover rate of existing Franchises – this information will be contained in the Disclosure Document. Specific things to look out for include a high turnover or transfer rate (suggesting not all franchisees are successful), the existence of legal proceedings against the franchisor, and the location of other franchises. What business performs well in one state, will not necessarily do so in another.

Read the Information Statement provided with the document – the law prescribes that this be provided to you, for a reason. It contains important information pertaining to the nature of the Agreement you are entering into.

Talk to other franchisees – usually their details are listed in the Disclosure Document; it’s incredibly valuable to talk to someone who is already doing exactly what you propose to do; and

Look at the ability to transfer or sell – usually, these provisions will be set out under a sub-heading “Transfer” in the Franchise Agreement. Before you sign up for a long term contract, you want to make sure your business will be saleable if, for whatever reason, you cannot carry it out for the entire term.

Conclusion

Whatever you do, don’t just sign that big bundle of legal documents blindly. Franchising is an expensive, long term commitment wherein you will be largely reliant on the business practices and success of your franchisor. It is important to take careful steps in reviewing a franchise agreement.

If you are in need of a franchise lawyer to help you sort through the documents or undertake a review, get in touch with us at LegalVision.

Emma is an experienced franchise lawyer and litigator who has successfully helped many clients achieve commercial and workable solutions to their legal problems. With over 10 years legal experience, Emma has run many cases in all tiers of the NSW Court system and Family Court of Australia, as well as having many years experience in advising clients of their legal rights in both the commercial and family law spheres. Emma is also experienced in drafting a range of documents, including complex binding financial agreements for high wealth individuals, franchise documents, and all other commercial contracts.

Ask Emma a Question

If you would like further information on any of the topics mentioned in this article, please get in touch using the form on this page.